CRANBURY (DTN) -- Nearest delivered New York Mercantile Exchange oil futures and the front month Brent crude contract on the Intercontinental Exchange registered modest declines on Monday following an overall neutral monthly report from the Organization of the Petroleum Exporting Countries, and ahead of Wednesday's monetary policy announcement by the Federal Open Market Committee that could turn hawkish.
FOMC on Nov. 3 announced the start of tapering $120 billion in monthly purchases of Treasuries and mortgage-backed securities by $15 billion a month which was seen by some market observers and Fed watchers as a late and weak reaction to expanding inflation. It wasn't until Nov. 30 in testimony before a Senate Banking Committee that Federal Reserve Chairman Jerome Powell said it was time to retire the word transitory in explaining inflation pressures, which spiked 6.8% year-over-year in November, a 39-year high for the Consumer Price Index.
The CPI released Friday by the Bureau of Labor Statistics was broad-based, expanding beyond high prices for used and new vehicles, where a shortage of semiconductors, among other raw materials, was seen caused by the COVID-19 pandemic induced recession and subsequent spike in buying amid pent-up demand and federal largesse. Once the supply chain worked out the kinks, recessionary pressures would come under control.
However, this scenario is not playing, with costs increasing sharply for not only the volatile food and energy categories, which the Fed likes to strip out, but also for transportation, apparel and shelter, with the latter likely understated.
"The Fed is now far behind the inflation curve and losing any remaining credibility it once had as an inflation fighting institution," said Charlie Bilello with Compound Capital Advisors, LLC, in their weekly newsletter on Saturday.
While not all Fed officials agreed, the central bank appeared comfortable in gradually tapering its purchases through June 2022, clearing the way for an increase in the federal funds rate, now targeted between zero and 25 basis points, sometime during the second half of 2022 if needed. Six weeks later, and the slow walked approach will likely be jettisoned, as November's inflationary pressures look to force the Fed's hand.
Bloggers at ZeroHedge are keeping score, with Morgan Stanley now joining other Wall Street banks in calling for an increase in the federal funds rate in 2022 after expecting no rate hikes. Morgan Stanley now thinks the Fed will announce an accelerated pace of tapering at Wednesday's meeting, and for the dot plot to show two rate hikes in 2022, three or more rate hikes in 2023, and three rate hikes in 2024.
The U.S. dollar index strengthened 0.257 to settle at a 96.357 four-day high, while major equity indices largely declined, including a more than 300-point falloff in the Dow Jones Industrial Average late afternoon.
NYMEX January West Texas Intermediate futures eased $0.38 to $71.29 per barrel (bbl), with ICE February Brent futures ending $0.76 lower at $74.39 bbl. NYMEX January ULSD futures settled down 1.88 cents at $2.2328 gallon, with the January RBOB contract sliding 2.07 cents to $2.1165 gallon.
Brian Milne can be reached at firstname.lastname@example.org